Kent State ESOP Governance Conference

Transcription

1 Kent State ESOP Governance Conference Avoiding the Bumps in the road to Effective ESOP Governance By Jack Veale, PTCFO, Inc

2 Transitions in Governance Avoiding the bumps is about the pitfalls of the governance transitions Governance involves the founder(s), trustee(s), a board of directors, and the employee owners Let's take a quiz to understand this transition

3 Let's cover more theory Charles Darwin is famous for what? Theory of Natural Selection Living beings will modify/adapt to survive Albert Einstein is famous for what? Theory of Relativity- Mass, Energy, space and time - A flashlight loses weight when the light is on.. mass declines as energy is expended

4 What does Darwin, Einstein and Soduko have in common? Soduko demonstrated that having the right skills for the right challenge, allows faster action and results without a lot of information required Darwin's Theory reminds us that we must change to survive Einstein's Theory reminds us that without energy expended, successful change is less likely to occur Governance is about dealing with change and organizational energy

5 What Did You Learn? Members of the Board don't all have the same talents, time is required to educate Selecting the right members is not about board experience, it is about facilitating change Time, not talent is a key issue for board development

6 At what point, in the new CEO's tenure with the company, does he/she become most productive? 5-10 Yrs 8.0% 10+ Yrs 2.0% 6 Mths 3.0% 6 Mths 1-2 Yrs 3-5 Yrs 5-10 Yrs 10+ Yrs 1-2 Yrs 33.0% 3-5 Yrs 54.0% Source: USA Today 8/24/06 Pg B1

7 BOD Governing Issues- 50kFT Annual Capital & Operating Budgets Quarterly Results Financial Policy Mgmt Control Systems Senior Mgmt Performance & Compensation LT Agreements Development & Implementation of Strategic Plan Major Organizational restructurings Employee/Community relations Succession Plans Fostering Innovation Advising Management

8 Staying at 50,000 Feet Five Types of Boards 1. Passive Board (Least Involved) 2. Certifying Board 3. Engaged Board 4. Intervening Board 5. Operating Board (Most Involved)

9 Passive Board Typical with few independent directors or Strong Founding CEO CEO controls function and actions Limited activities and participation Limited accountability Ratifies Mgmt Preferences

10 Certifying Board Certifies to shareholders CEO is performing as expected, Mgmt will take corrective action High need for independent directors CEO evaluation by external directors Established orderly succession process Willing to change management to be credible

11 Engaged Board Provides insight, advice, support to CEO & Mgmt, high level of interaction, discussion Takes time to define the roles and behaviors, boundaries and responsibilies of board and CEO Knows Ultimate responsibility to oversee CEO and company performance Will seek outside experts to add value to decisions

12 Intervening Board Usually found in Crisis... or Absent or dysfunctional CEO Frequent meetings, often on short notice Intense involvement with Key Issues Focus on achieving Action Plans

13 Operating Board Great for Start-ups, new divisions Makes Key Decisions that Management then Implements Fills in Management Experience Gaps "Hands on" on selected activities Usually developing product, market, systems, staff, and/or Financing

14 Governance Protection Duty of Care: Business Judgement Rule Care: attend meetings, be prepared, seek outside advisors for complex issues Duty of Loyalty: No Conflicts of Interest Loyalty: Independence vs self dealing Process: Meetings, attendance, notices committees, documentation, reporting

15 Stages of BOD's Early Stages: Advisory Boards CEO/Owner invites Friends and family to build Governing (not advisory) board Advisory Board forms with outsiders and meet separately, build board engagement Over time, Mgmt invited to Meeting Board and Mgmt's relationship evolves Integration begins with both boards

16 Stages of BOD's (cont'd) Middle Stage: Evolving Governing Board Family or management begins to resign Development of Governance Processes Determination of Shareholder Value Learning to "sniff, don't touch" Outside Directors evolve to a majority, can meet separately without Mgmt/CEO

17 Stages of BOD's (continued) Mature Stage:"Public Company" behavior Set and Monitor Goals, Mission, Mgmt Development & Performance Standards Functional and Performing Committees Directors represent Shareholder interests CEO reports to board, and can be fired Directors are collegial, engaged, proactive

18 Board Actions to Avoid Pitfalls Develop a Strategic Plan (15 Yrs) Have Independent Directors Create Committees and Charters Attract the Right Directors Stay at 50,000 Feet An Agenda is a guide, not a rule Governance is like baking a cake

19 Board Actions to Avoid Pitfalls Avoid Conflicts of Interest Typical profile CEO is trustee, board member, CEO, ESOP Committee Family members are board members, owners, managers, ESOP Employees ESOP Employee, trustee, board member

20 Board Actions to Avoid Pitfalls Avoid an internal director majority Engage with the independent Trustee Read the ESOP Trust Documents Prepare a Director's Orientation with a carefully developed board book Develop Founder's Intent to define Trustee's responsibilities

21 Board Actions to Avoid Pitfalls Founder/Family Transitions Founder Dies, what's the board's role? Founder sells all, what are the roles for? 30% ESOP... family in control... what are the roles for all? What is the difference between shareholders and stakeholders?

22 Board Actions to Avoid Pitfalls Set the meeting dates far in advance Seek agenda items 3 weeks before meeting Send agenda with board package Use advisors when dealing with difficult situations Set time limits for non CEO internal directors

23 Finally, Things to Ponder What should the relationship be between the CEO and the board & Trustee? What about the Board and the Trustee? You are a board member, and the employees feel they should have more control over the management of the company. Now what? What about Candor?